Taxes and Government Incentives: Eastern Europe vs. China

Roger H. Gorden and David D. Li

No 56, William Davidson Institute Working Papers Series from William Davidson Institute at the University of Michigan

Abstract: Local officials in China have strongly supported new non-state firms, yet other officials in transition countries have often strongly hindered them. We argue that a likely cause of these sharp differences in behavior is differences in the source of government revenue. Local revenue in China came from profits and other taxes on new entrants, while elsewhere in transition countries tax revenue came disproportionately from the old state enterprises. All these officials can easily draw on public funds for personal use. As a result, local Chinese officials have a personal interest in encouraging the development of new firms, while other officials have a financial interest in suppressing new firms. To induce officials to be supportive of new firms, the model suggests raising the effective tax rate on these firms. Surprisingly, past work has ignored the role of the tax system in influencing the incentives faced by government officials.

Keywords: transition economies; government incentives; principal-agent models; taxes and economic behavior (search for similar items in EconPapers)
JEL-codes: D78 H3 P51 (search for similar items in EconPapers)
Pages: pages
Date: 1997-04-01
New Economics Papers: this item is included in nep-eec, nep-ent, nep-pbe and nep-sea
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Citations: View citations in EconPapers (7)

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